Price–earnings ratio

The price-earnings ratio (PER ) (English Price - earnings ratio ( PER) or P / E ratio ) is an indicator for the evaluation of shares. Here, the price of the stock in relation to the given or expected for the same period, earnings per share is set.

Earnings per share can refer to both fixed as to expected values ​​. The PER plays a major role in the equity analysis. There are always considered estimates for the future.

• 3.1 Example

Examples of calculations

Example 1

The current price of a share amounts to € 50. In the last fiscal year, a profit of € 4 per share has been achieved. So it turns out:

This ratio indicates to which multiple of the result of the last financial year a stock is rated on the stock exchange at the time. OR: The PER indicates how many years it will take for the company realized the value of his shares as profit. In this case, 12.5 years. Would the company each year generate 4 €, earnings per share, it would take 12.5 years, up to 50 EUR ( value of a share ) would be generated. That would be the case for example if the company generates 16 million profit and had 4 million shares. Consequently, the PER is better, the smaller it is for a purchase of shares.

Example 2

The current price of a share amounts to € 50, while analysts expected a profit of € 5 per share for the coming fiscal year. So it turns out:

This ratio indicates with which many times their expected earnings a stock is rated on the stock exchange at the time.

Interpretation

The price-earnings ratio indicates how many times the gain of the gain is "paid" the price of the shares included in the current price of a stock or how many years. 50 euro profit would share the constant generate four euro profit up, so would come together after 12.5 years. Due to the increase of one euro, the period is reduced to ten years.

However, this interpretation is no longer valid if the company makes losses. Because, by definition, the PER is thus negative and the stock would never be "paid" by winning. Often used to this definition gap for values ​​less than 0 to bypass instead of the profit, cash flow per share, calculated and, alternatively, the KCV.

KGV after time, country and industry

The price-earnings ratios vary greatly, depending on which countries, industries and years is considered. Reasons for the differences lie in the opportunities / risks of the securities and the level of interest rates and inflation.

In the German stock market were in the 1970s and 1980s PERs of 8 as cheap and of 15 as expensive. Since the 1990s, the PE ratios of 12 to 25 vary in relation to the overall market. In the 30 DAX stocks the PER is the historical average at 14.6. In contrast, the PER 2008 was significantly fewer than 10

Example

The figures from the Annual Report 2005, Verbund AG (Austrian Electricity Management AG):

Despite steadily rising earnings / share the PER increases from 2004 due to the significantly higher share price again.

Earnings yield and market interest

The PER of the stock market is also influenced by the prevailing interest rate. The reciprocal of the earnings, ie, earnings per share divided by the share price, represents a kind of return on the share - a kind of earnings yield - dar. Since investors investment opportunities with highest profitability prefer, there is an equalization of rates of return according to the law of supply and demand by so-called arbitrage transactions. The market value of shares adapts accordingly so that the reciprocal of the PER at the prevailing interest rate, adjusted for risk premiums, oriented.

Lowers Central Bank ( an instance that usually significant influence on the general level of interest rates ) the prime rate, this leads to a certain time delay, ceteris paribus, to higher price-earnings ratios: rising stock prices. If the interest rate is raised, so accordingly decrease the PER and thus stock prices.

In addition, the interest rate may affect the company's profits and hence the PER and enhance the effect explained above by the cost of debt.

Stocks with high PER sensitive to interest rate changes than those with low price-earnings ratios.

Pitfalls

The PER is now one of the most used indicators for stock valuation. Its application, however, is more complicated than it suggests, reproduced above formula.

• Prizes can not be updated easily in the future. Economic Cyclical fluctuations have to be considered as well as effects of internal changes and changes in competition, consumer behavior, interest rate trends and product life cycles, etc. Also completely unpredictable factors such as weather and political decisions play a role in some industries.
• Unique, extraordinary income and expenses are also to ignore such temporary fluctuations in the tax rate.
• In uncertain risk estimate haircuts. In certain growth prospects, however, a PER - charge may apply.
• Profits can be manipulated within certain limits by the formation and dissolution of hidden reserves and by changes in payment terms. An additional analysis of the cash flow can enter on digestion.
• The PER describes the current earnings of the company, not the future. It is possible that a company that today generates little profit, because a lot of money goes into product development, neglected a better future than a similar company which, while generating more profit but the product development.
• Public companies have to press releases from different profit measures. People like to "forget" to withdraw the profit attributable to minority interest. Sometimes only the profit before tax before interest and taxes (EBIT ) is called. However, earnings per share is relevant for the earnings, net of interest expense, taxes and non-Group profit shares.
• For a meaningful comparison of the calculations, it is important that specifies which share price used in the calculation (average price, highest price, price at year-end price at beginning of year).

Shiller KGV

Due to the shortcomings of the traditional price-earnings ratio, defined the distinguished for its empirical analysis of capital market prices the Nobel Prize U.S. economist Robert J. Shiller as a variant of a 10-year earnings. Basis of calculation is not the result of temporary special items often little meaningful previous year's profit, but the inflation-adjusted average earnings for the last ten years ( Moving Average ). This ratio is referred to as Shiller KGV (german P / E 10 ratio, Shiller P / E or cyclically adjusted PE = CAPE ). The Shiller price earnings ratio is due to its longer observation framework for long-term investment strategies and in particular to over-valuations, even in the overall market, such as speculative bubbles to recognize.